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Integer Alerts

Is there an end to high SOP prices?

Integer’s Lead Potash Analyst Rebecca Hayward introduces Integer’s research on SOP with a focus on the reasons behind the sustained SOP price premium over MOP, it’s future and likely SOP capacity developments

Unlike the chloride-comprising counterpart muriate of potash (MOP), SOP (potassium sulphate) is positioning itself as the golden child of the potash family. Since MOP prices reached a cyclical low in 2016 and with only modest increases from this level in 2017, the investment appetite for MOP projects has diminished. Perhaps the best example of this trend is BHP’s decision last year to delay seeking board approval for the US$14 billion Jansen project until next year, at least.

When it comes to potash capacity investments, the most promising activity is focused on a product that accounts for 10% of the overall K2O market. As ever, the enthusiasm comes down to prices and in the case of SOP, it’s premium value which has become disconnected from MOP. With SOP selling at a ~US$270 per tonne premium over MOP since 2014 in a market that is profitable, growing and at times undersupplied, it’s unsurprising that SOP projects are attracting attention.

In our annual SOP Outlook reports, we examine SOP market dynamics in detail, including the future of prices and the premium over MOP, and most likely evolution for supply and demand over the next ten years. This article is based on findings from our latest SOP Outlook Report, released in December 2017.

Why does an SOP premium exist?

SOP prices command a premium over MOP in part because of its suitability for application on higher-value chloride sensitive crops. This means that growers are willing to pay a higher price for its potash content compared to MOP. To put this in to context, NW Europe FOB SOP prices per tonne of K2O averaged over US$1000 in 2017 compared to US$360 per tonne K2O for MOP at Baltic FOB.

Another key factor is SOP production costs. Broadly speaking, SOP is produced using two methods – primary and secondary. Primary production involves mining and processing SOP containing ores. Historically, SOP prices have tracked MOP at a premium of US$100 per tonne (shown in the chart below) which represented the transformation cost of MOP to produce SOP via the secondary Mannheim method, and accounts for around 50% of SOP capacity or thereabouts.

Secondary SOP production, or Mannheim capacity, utilises MOP as feedstock for producing SOP, as MOP is reacted with sulphuric acid in a Mannheim furnace. However, since 2014, MOP prices have deteriorated while SOP prices have held up meaning the disparity between the two has increased.

In our latest SOP Outlook report Integer investigates the reasons behind the sustained SOP premium. With global industry utilisation rates at 63% in 2017, it begs the question, why is the market not more competitive and prices lower?

The answers relate to the intrinsic nature of SOP production processes and the geography of supply. Much of global spare capacity is located in China but is isolated from the international market because of a prohibitively high export tariff imposed by the government of China. There is also a limit in the extent to which existing secondary producers can increase output to service growing demand, due to limits on output of co-products.

Secondary (or Mannheim) producers of SOP, such as in Europe, the Middle East and East Asia can only produce as much SOP as the by-product hydrochloric acid (HCl) they can dispose of. For every one tonne of SOP produced via the Mannheim method, 1.2 tonnes of HCl is produced. HCl is costly to handle and transport, and the market is structurally oversupplied meaning in some cases, HCl disposal can result in negative values for producers and make secondary SOP production unprofitable for producers.

What will happen to the SOP premium in future?

The future of the SOP premium will likely hinge on the extent of capacity investment and the likelihood of an export tariff repeal from China. If future SOP demand growth plays out as our forecast model predicts, the SOP market will become increasingly undersupplied in the coming years without capacity investment. There are numerous primary and secondary projects at various stages of progress toward production.

Headline news for the SOP market in 2017 was the emergence of the primary SOP producer Archean in India and growing secondary SOP capacity from Evergrow in Egypt. We examine the impact of these new entrants as well as analysis of around 35 primary and secondary projects worldwide (mapped below) in our SOP Outlook report.

Some of the most advanced primary SOP projects are located in East Africa and North America, with Yara, Danakali and Circum Minerals advancing projects in Ethiopia and Eritrea, and Potash Ridge and Crystal Peak Minerals doing the same in Utah. There is cluster of activity among the salt lake projects in Australia, and although these are relatively less advanced, we might see a small scale pilot plant from Salt Lake Potash’s Goldfields site at some stage.

We are also keeping an eye on secondary capacity developments which typically have lower capital costs and shorter lead times, many of which are positioned in the Middle East (Oman, Iran, Egypt among other countries).

We follow key project parameters and benchmark projects against one another to present our view on the mostly likely capacity developments over the next ten years. Using our projection of the SOP balance and by presenting our case for the most likely influence of China on the international SOP market, we explain our view on the level of the SOP premium.

More information on the SOP Outlook Report

If you have an interest in the SOP business, and want access to analysis and data that addresses the key questions facing the industry, we strongly recommend you speak to us about our SOP Outlook report.

Contact us using the details below if you’d like more information on the report, or would like to discuss our point of view on the SOP market: